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Year In Review 2014

  Equities Flexible Income

What Worked

•    The Upgrader Funds have the ability to invest globally. Since U.S. markets led for most of 2014, the Funds were focused in the U.S.  
•    Large-cap stocks outperformed small- and mids*, and we moved the Funds’ portfolios out of small- and mid-cap funds and into large-cap funds and ETFs, which had better recent returns.
•    Avoiding lagging areas, like emerging markets and Europe, for most of the year worked. Most foreign markets had losses for the year.

•    Higher-quality bonds led in 2014, and we increased exposure to these funds during the year.
•  The fear of higher interest rates pushed many investors into short-term bonds. But we avoided short-term bonds in 2014 and took advantage of higher yielding areas of the bond market instead.
•  We aren’t limited to bond funds. We can also invest in total-return funds, which tend to have exposure to both stocks and bonds. These funds added value in 2014 as both stocks and bonds had gains.

What Hurt

•    Foreign, value and smaller-cap funds briefly came back into favor in 2014, and we bought into these funds only to sell them as performance faltered. In hindsight, it would have been better to have stayed in U.S. large-cap growth funds all year.
•    Some technology and biotech positions sold off sharply in March and April and were replaced. But these funds later recovered and we bought back in. 
•    The Tactical Fund was defensively positioned at times while the market rallied and had limited participation in the market’s gains.

•    High-yield bonds have been in favor and we’ve held these funds for much of the last five years. But this trend reversed course in the second half of 2014. While we began to move out of high yields in August, our limited exposure to these funds hurt, particularly in the last quarter.
•    The “flight to quality” in the last quarter boosted Treasuries, particularly long-term government bonds, and mortgage-backed securities, and we were underweight in these areas. Treasuries and long-term bonds tend to have higher interest-rate risk.

What Now

•    The Funds are aligned with the current U.S. large-cap leadership. Market leadership trends typically last years, but they do end. That’s why we regularly reassess the Funds’ portfolios and seek to change the portfolios in response to changing market leadership. 
•    Index funds tend to be popular when market indexes are doing well, as they did in 2014, and our Funds own both index and actively managed funds. If index leadership continues, we’ll be led to increase our exposure to index funds and ETFs. 

•    Many expect 2015 to bring higher interest rates. We remain underweight in interest-rate sensitive areas of the bond market, and our strategy is designed to adapt to interest-rate changes. 
•    The Funds are primarily focused on higher-quality U.S. bonds, but we have small positions in lower-quality high-yield bonds and dollar-hedged foreign bonds. If the trend toward higher-quality bonds continues, we’ll be well positioned, and if high yields or foreign markets recover, we’ll have some participation.

Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance of the fund may be lower or higher than the performance quoted. Performance data quoted current to the most recent quarter- and month-end may be obtained by clicking here.

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